Europe’s chemical industry is being subjected to new global political and economic forces which create uncertainty but also offer exciting opportunities, according to the director general at Europe’s trade group Cefic.
While trade tensions, Brexit, and an economic slowdown are creating nervousness about the future, longer-term issues such as the circular economy and digitisation mean it is also an exciting time to be working in the chemicals industry, said Marco Mensink.
“The uncertainties towards the end of the year are increasing and we’re seeing some sort of slowdown,” he said. “People are holding their breath for major developments and it could well be that some investment decisions are delaying because of the uncertainties.”
He said capacity utilisation is slightly going down towards the end of the year and demand might slow down. In the past couple of weeks, ICIS has reported a downturn in purchasing manager indexes across all major regions including the US which has, so far, shown economic resilience.
“There are a large number of geo-political discussions going on such as the US and China on trade as well as Brexit. Both have potentially a large impact – it feels like people are holding their breath to see how they play out,” said Mensink.
He points out that Europe has had two-to-three good years but as chemicals is a cyclical industry people are asking how long it can last.
TRADE FLOW REORDER
The trade war between the US and China will lead to a reordering of trade flows rather than directly cutting global demand, said Mensink. Overall demand is still strong as growing populations increase consumption of chemicals.
“I think China will become even more self-sufficient, the Gulf might supply more to Asia, and the US might import less as the new polymer capacities come online,” Cefic’s DG said.
“In that scenery, Europe will have to find its way.”
He said the world will become more fragmented, but not necessarily develop into two competing trade blocs. There could be less intra-regional trade, making it important for global chemical companies to have production in those regions.
“Of course, companies will continue investing in China and the US. Global companies will operate in all those regions but there might just be less trade flows between those regions,” said Mensink.
Africa has huge potential as a market for Europe chemicals, said Mensink. He pointed out that by 2100 there will be 10 times more Africans than Europeans, whilst by 2050 there will be as many Nigerians as Europeans –around 500m.
“China is aiming at Africa with its One Belt One Road policy. European Commission [the EU’s executive body] president Jean-Claude Juncker recently mentioned a trade policy for Africa. This is an enormous market at the southern border with Europe, which Europeans can cater to.”
US POLYMER START-UPS
Asked about the impact of around 4m tonnes/year of new polymers capacity coming onstream in the US over the next two years, Mensink highlighted the fact that most global companies have production assets in Europe and the US. He said the new capacities are more likely to be sold in Asia and Latin America, as these markets are not so saturated.
“We are part of a global system with global companies. Companies will adapt and find opportunities in the market. The strength of Europe is its link to downstream value chains, so that makes replacement not so easy,” said Mensink.
He agreed that chemicals is a cyclical business which has been in a prolonged upcycle which has to come to an end some time.
“If you think about cyclicality – look at the mid-2020s – when will over-capacities bite? I don’t think tomorrow, but definitely in the next decade that moment will come,” he said. “If global consumption slows down, then it will come earlier than we expect.”
Cefic has been campaigning to keep the EU and UK chemicals regulatory environments connected post-Brexit, and the group has drafted guidance papers on how to prepare for a hard or softer Brexit. Mensink is optimistic that a deal will be struck because it is in everyone’s best interests.
“You might call me an optimist, but I always believe that political negotiations end up with early morning deals with people who look tired and sweaty – I haven’t seen that yet,” he said.
“There are so many motives, both political, logical, and economic that I believe a deal will come. If we end up with the WTO [World Trade Organization] scenario, then you are getting tariffs and you are out of the customs union.”
He went on to say that logistics would be more complicated to manage, adding that it would not be a single tariff to applied as companies ship goods across the English Channel several times, for instance in sector that have long supply chains like automotive.
“Paying tariffs two, three or four times will change cost structures and trade flows,” said Mensink.
Cefic is developing a mid-century strategy which looks at the impact of digitisation and the circular economy, among other trends. Circular economy involves a lot more cooperation between different segments of value chains and this could lead to the blurring of traditional sector boundaries. This is already happening with some joint ventures between chemical companies and recyclers.
In September, US chemical major Dow said it is cooperating with Tata Steel to use waste furnace gases to produce syngas and naphtha.
Recycling will have an impact on demand for virgin chemicals, but it will be in the long-term, said Mensink, because the technology is currently at very small volumes compared to the market as a whole. Chemicals recycling produces feedstocks like naphtha.
“If you look to the future we will be circulating molecules and there is only one industry which can do that –´ chemicals.”
He pointed out that other sectors like glass, metals and paper have adapted their business models to large-scale recycling, and so can chemicals.
Artificial intelligence and big data will change the way the industry produces and allow for improvements such as predictive maintenance.
“What’s less discussed is how integrated will we be with our value chains, the role of big data in science and blockchain in value chains. We think they will be game-changers 20-30 years from now,” he said.
For Mensink, the 2020-2030 period could see a new era for the chemical industry, driven by the digital and circular economy transformation.
“Yes, uncertainty increases but it’s going to be a very exciting decade as well.”